Why You Shouldn’t Close Old Credit Cards

Introduction

Closing old credit cards might seem like a smart financial move, especially if you no longer use them. However, doing so can negatively affect your credit score in several ways. This guide explores why keeping old credit cards open is crucial and how it can strengthen your financial health.

How Credit Scores Are Calculated

Understanding how credit scores work is essential before deciding to close any accounts. Here’s a breakdown:

Payment History (35%) – Consistent, on-time payments boost your score.
Credit Utilization (30%) – The ratio of your credit card balances to credit limits.
Credit History Length (15%) – How long your credit accounts have been active.
Credit Mix (10%) – A variety of credit types, such as loans and credit cards.
New Credit Inquiries (10%) – Applications for new credit accounts.

Closing old credit cards affects at least two of these factors—credit utilization and credit history length.

Why Keeping Old Credit Cards Open Helps

1. Maintains a Long Credit History

Positive Credit History: The longer your credit accounts remain open, the better your credit score. Lenders prefer seeing a lengthy credit history.
Example: Closing a 10-year-old credit card could reduce your average account age, lowering your score.

2. Reduces Credit Utilization Ratio

Lower Utilization: Credit utilization measures how much of your available credit you’re using. Closing an old card decreases your available credit, raising your utilization ratio.
Example: If you have $10,000 in total credit and owe $2,000, your utilization rate is 20%. Closing a $5,000 credit card increases your utilization to 40%.

3. Boosts Your Credit Score Stability

Consistent Score: Keeping old cards open stabilizes your credit score by maintaining your credit history and utilization ratio.
Example: If you’re applying for a mortgage, stability is key to getting the best interest rates.

4. Increases Credit Options

Emergency Backup: Old cards can serve as emergency credit lines.
Rewards Potential: Many old cards still offer rewards or cashback benefits.

When Closing a Credit Card Might Make Sense

There are specific situations where closing a credit card is reasonable:

High Annual Fees: Consider closing cards with high fees unless the rewards outweigh the costs.
Fraud Risk: If the card is compromised and no longer useful.
Temptation to Overspend: If you struggle with credit discipline, closing the card may prevent further debt.

How to Properly Close a Credit Card

If you must close a credit card, follow these steps:

Pay Off the Balance: Ensure the card has a $0 balance.
Redeem Rewards: Use any accumulated points or cashback.
Cancel Recurring Payments: Update subscriptions tied to the card.
Contact the Issuer: Request the account closure and confirm it in writing.
Monitor Your Credit Report: Check that the account shows as “closed by customer” to avoid negative remarks.

Alternatives to Closing Old Credit Cards

Keep It Active: Use the card occasionally for small purchases and pay it off monthly.
Downgrade the Card: Ask the issuer about switching to a no-fee version.
Consider a Product Change: Some cards allow upgrades or downgrades without affecting your credit history.

Common Myths About Closing Credit Cards

Myth: Closing a card improves your credit score.

Fact: It can harm your score by reducing credit history length and increasing utilization.

Myth: You should close cards you no longer use.

Fact: Inactivity doesn’t hurt your score, but closing the account might.

Myth: Old credit cards are useless if they have no rewards.

Fact: Their primary value lies in maintaining credit history and keeping utilization low.

Conclusion

Closing old credit cards might seem like a smart financial move, but the long-term impact on your credit score can be significant. Maintaining your oldest credit cards helps preserve a robust credit history, keeps your utilization ratio low, and stabilizes your credit score. Be strategic about managing your credit accounts to maximize your financial well-being.

For personalized credit management advice, contact LM Financial Consulting LLC. We’re here to help you build and maintain a strong credit profile. Check out our Tradeline Services and increase your chances of approval for credit cards, mortgage loans, auto loans, student loans and etc.